The accounting scams in the US might write off up to 25 per cent of earnings from the S & P 500 and this will lead investors to face negative returns for a number of years, warnsState Streetgroup chief investment officer Alan Brown.
“For some time, we were warning of stocks being over-valued and the need to watch for time bombs,” he told a Melbourne briefing yesterday.
“Well, there have been some time bombs and it is estimated the NASDAQ 100 pro-forma earnings have been overstated by $100 billion.”
Brown, who opens the Investment and Financial Services Conference in Brisbane today, says it will be easy to strip 20 per cent of the earnings of many companies in the US, and this will mean the stock valuations will have to come down.
It is estimated that off-balance sheet debt is about 33 per cent of on-balance sheet debt in the US.
“The US authorities are going to curtail special entity vehicles which companies had on the market to cover credit paper issues,” he says.
“We will need to watch that these companies don’t breach their lending limits when the vehicles go.”
Europe and Japan also present gloomy pictures for the future, Brown warns, but the bright spot is Asia which includes Australia.
“Excluding Asia, equity market returns have been poor for the last two and a quarter years, however, Australia has been shielded from all of this,” he says.
“We are heading for the third year of poor returns and this means it will be worse than the 1973-74 recession.”
Brown says the most exciting thing about that recession was the fantastic years for returns that occurred in 1975. But he gives little hope of global markets bouncing back so strongly in 2003.
However, a major global recession will be avoided if consumer confidence in the US keeps up and drives the economy.
There is also concern that investors will flee the markets and invest in property, he says.
In Australia this is already starting to happen. Brown says if there is a property bubble that subsequently bursts, the economy could go into recession. This situation happened in the early nineties in Australia.
In Europe, where property is booming, inflation is under control thanks to the Eurobank, says Brown, but consumers are less willing to spend and this is slowing the local economies.
“We don’t see Europe as an engine of growth,” Brown says.
The outlook for Japan is gloomy as consumer confidence has collapsed. Brown does not believe the economic reforms have happened.
“The Japanese government’s finances continue to deteriorate,” he says. “Moody’s recently downgraded government debt to A2, which is below Botswana.”
Brown says investors are faced with US markets remaining a battleground, with UK and Europe performing not much better and difficulties with being positive about Japan.
